India Microfinance

Helping or hurting: What role for microfinance in the fight against poverty?

All Party Parliamentary Group (APPG) on Microfinance which is based in the UK has released a report titled Helping or hurting: what role for microfinance in the fight against poverty ? In December, the APPG had launched an inquiry into how the UK Government and Donors should contribute to the microfinance field. The APPG has more than 30 members from both the House of Commons and the House of Lords, representing all of the main political parties of the United Kingdom.

Helping or hurting: What role for microfinance in the fight against poverty?

Download the report at the link below : Right click and choose “Save Target As” or “Save Link As”

Executive Summary

“58% of the poor who borrowed from Grameen are now out of poverty. There are over 100 million people now involved with microcredit schemes. At the rate we’re heading, we’ll halve total poverty by 2015. We’ll create a poverty museum in 2030.” – Professor Muhammad Yunus, speaking to Time Magazine in 2006

“The microfinance movement has been in operation now for some 30 years and in that time it has failed to provide robust evidence that it is meaningfully associated with sustainable poverty reduction and ‘bottom-up’ economic and social development…But even worse, many economists and development specialists are now of the firm opinion that MF actually UNDERMINES the process of sustainable poverty reduction and ‘bottom-up’ economic and social development.” – Dr Milford Bateman, written response to this inquiry, 2011

These two quotes are illustrative of two extremes in the debate over the impact of microfinance on poverty. Currently the microfinance sector is undergoing a massive period of upheaval. After 30 years of growth, the sector has diversified to include a wide breadth of different interventions, products and business models. We believe this diversification is probably a good thing, ensuring that there are a variety of different models available to clients – particularly where it has resulted in access to a variety of financial services, including savings and insurance as well as the traditional credit. However, there are clearly also big problems : while microfinance models have adapted and grown the environment in which they operate has been left relatively unchanged and regulatory frameworks have been slow to develop. Out of this ‘free’ environment where investment is in many cases abundant and regulation is sparse there have emerged concerning stories of exploitation as well as suggestions of significant progress out of poverty.

The Microcredit Summit Campaign Report is produced every year and is traditionally a place for celebration of the rapid growth of the industry. In 2011, it took a step back and examined the divisions that have come to light, highlighting these through the story of two microcredit clients.

Rita in Ghana received an $80 loan, along with technical education and membership of a solidarity group, which has enabled her to diversify her income, save, pay school fees and get her family through the traditional “hungry season” before the crops ripen. Rita has big dreams for the future: “The biggest thing for me was starting to save. I had never saved before. Now I have savings to tap when it’s time for the school fees and other needs, including more food. My family is better now. We eat better. I want to save more, so I can use my own money for the farm instead of taking out loans. I want to meet people who earn more money, so I can learn from them.”

Zaheera from Andhra Pradesh in India, on the other hand, was caught in a tragedy unfolding across the state. She died in an apparent suicide on September 13th, 2010. At the time of her death, she had loans outstanding from eight different microfinance institutions totalling Rs. 160,000 (US$3,500).1 She had no regular income, just odd jobs in town paying about Rs. 600 ($13) a week. She used most of the loan money for her daughter’s wedding. Zaheera’s husband explained “This is what drove my wife to suicide…she did not have the courage to face the group members, leaders and loan staff without making payments and there was nowhere from which we could repay all the money”.

It is our thesis that the approach to microfinance taken by donors, practitioners and even many critics, has so far been inadequate. In order to ensure that no microfinance client finds themselves in the position that Zaheera did, and that ever larger number of clients are able to use financial tools to help them move out of poverty like Rita, it is absolutely essential that we recognise two facts: firstly, that credit services can cause harm as well as good because they induce debt; and secondly that the sector is now so diverse that we have to assess individual microfinance interventions on their own merits and relate to them in appropriate ways rather than as a universally positive social force. We must cut through the hype and take a reasoned approach to how the UK government and other stakeholders should support the sector. For not-for-profit, socially focused microfinance this may mean continuing subsidies, along with encouraging increased focus on the evaluation of social outcomes, but for commercial microfinance it is more likely to involve appropriate, rigorous, but not overly onerous, regulation.

The strongest message we want to send with this report is that in many (though not all) regions the sector is currently unbalanced. While access to loans has expanded massively, other financial services have lagged. Where the only product available is a loan, customers will take a loan even if it is not the most appropriate solution to their financial needs. Poor people need access to savings, perhaps even more than access to loans, as well as insurance, safe remittances and other services. Until we extend comprehensive financial services to all we cannot truly claim to be ‘democratising financial services’, let alone contributing fully to the fight against poverty. DFID and other donors must play a central part in refocusing the industry. As Mark Napier, the incoming Director of Investment Innovation at CDC stated during an oral evidence session for this inquiry, donors should act as the ‘conscience of the market’.